China says hands off yuan; Obama talks tough

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China says hands off yuan; Obama talks tough


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BEIJING/WASHINGTON (Reuters) – The United States pressed China on Friday to move towards a market-based exchange rate but Beijing said not to meddle with its management of the yuan, setting the stage for a clash at next week’s G20 summit.

World leaders gathering in Toronto on June 26-27 are struggling to maintain the crisis-forged unity that has been credited with preventing another Great Depression.

But now that the global economy is on the mend, divisions are beginning to show.

U.S. President Barack Obama released a letter to his Group of 20 colleagues that zeroed in on prickly policy differences over China’s currency stance and debt-wary Europe’s rush to rein in bulging budget deficits.

Cui Tiankai, a Chinese vice foreign minister who is in charge of preparing for the G20 summit, said the yuan was “China’s currency, so I don’t think it is an issue that should be discussed internationally.”

China has kept the yuan, also known as the renminbi, steady at around 6.83 per dollar for almost two years to help its exporters ride out the global financial crisis. Many Western economists believe it is undervalued by as much as 40 percent.

Obama, under pressure from some U.S. lawmakers who accuse his administration of soft-pedalling on China, said free-floating currencies were “essential” to global economic activity, a thinly veiled reference to the yuan.

His administration has stopped short of accusing China of manipulating its currency to give it a trade advantage, something that some members of Congress have urged.

The Treasury Department delayed its regular currency report to Congress, which was due in April, angering some legislators who think the administration is dragging its feet.

A White House spokesman said the world would be “better off” if China had a market-based exchange rate and said there would be an update on the currency report after the G20.

The yuan rose to a one-month high against the dollar in offshore forwards on Friday as investors bet that China might eventually cave to growing pressure to let the yuan rise in value.

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Obama also directed stern words at Europe. In a letter to G20 colleagues dated June 16, he said the highest priority at next week’s meeting must be to safeguard the recovery and not succumb too soon to demands that government debt shrink.

“We worked exceptionally hard to restore growth; we cannot let it falter or lose strength now,” he said.

The United States has urged Germany in particular not to pull the plug on government spending too soon for fear that doing so will derail the still-fragile economic recovery.

Berlin thinks shoring up public finances is an immediate priority, underscored by Greece’s debt troubles and growing worries that other small, heavily indebted European countries could face a similar fate.

Obama said it was critical that the timing and pace of the fiscal pullback “suit the needs of the global economy” and not just domestic demands.

The United States and China appeared to find some common ground on this issue. Zhu Guangyao, China’s vice finance minister, said countries with serious budget deficits should accelerate fiscal consolidation but in a manner that is “growth-friendly.”

U.S. Treasury Secretary Timothy Geithner has used the same phrase to describe the U.S. position on debt.

Obama said countries should be prepared to respond quickly and forcefully to avert another slowdown if the recovery fades. That might not be well received at home, where Obama has faced resistance from Congress over adding to an already swollen government debt burden.

Former Federal Reserve Chairman Alan Greenspan urged the United States to concentrate on boosting its public finances, too.

“An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large U.S. borrowing capacity are misleading,” he wrote in The Wall Street Journal.

“Our economy cannot afford a major mistake in underestimating the corrosive momentum of this fiscal crisis. Our policy focus must therefore err significantly on the side of restraint.”

 

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Russia Pushes for New Reserve Currency

Russia Pushes for New Reserve Currency - WSJ.com

ST. PETERSBURG—Russian President Dmitry Medvedev on Friday said he hosted talks with Chinese leaders about turning the yuan into a convertible reserve currency, part of a broader goal to move international reserves assets into emerging-markets currencies and away from the dollar.

The Russian president, surrounded by Wall Street chiefs at an economic forum here, also outlined steps to boost foreign investment, including a cut in the capital-gains tax and overdue financial reforms, but investors said numerous barriers still obstruct Russian investment .

Mr. Medvedev said that a year ago at a meeting of the Shanghai Cooperation Union in the Urals Mountains city of Ekaterinburg, he discussed plans for boosting the international status of the Chinese currency, which is currently tightly controlled by the government.

Friday, he also named the Indian rupee and Russia's own ruble among the potential new reserve currencies. China and Russia have two of the three biggest war chests of international reserves.

"The future will show the correctness of our predictions, and I think the future of the world financial system is in the use of different reserve currencies and the creation of a multi-currency portfolio," Mr. Medvedev said.

"Three to five years ago, any discussion of this seemed like a fantasy that may never come true," he said. "Now we're discussing it in absolute seriousness with a number of countries, including our American partners, who are perhaps least interested in other currencies replacing the dollar."

The growing economic clout of Russia, China and India means it makes some sense for their currencies to form a greater share of global reserves, said Neil Mellor, currencies analyst at the Bank of New York Mellon in London, adding that it will be a "very, very long-term shift."


China will probably move cautiously toward making its currency convertible because doing so completely would allow unrestricted access to domestic securities. In recent years, Russia opened its ruble and bond markets, only to see the currency face a painful devaluation in late 2008 and early 2009 after commodity prices fell. The central bank still acts to control the ruble's volatility as Russia faces alternate bouts of speculative capital, attracted by relatively high interest rates and oil price gains, and sharp selloffs amid global risk aversion.

Besides boosting Russia's clout abroad, Mr. Medvedev said he would eliminate taxes on certain long-term direct investments in Russia by 2011 and clear the way by the end of the year for a central securities depository, which would allow large investors concerned about trading and holding stocks and bonds to invest locally in Moscow for the first time.

The lower level of parliament on Friday gave preliminary approval to legislation that would allow authorities for the first time to pursue insider trading.

"Russia needs a real investment boom," Mr. Medvedev said. His chief economic aide has said that in the absence of rising commodity prices, Russia requires foreign investment to boost annual economic growth above 5% annually, a level other major emerging-markets include Brazil, India and China are seeing this year.

Still, some investors are inured to the influence of friendly rhetoric repeated by the Kremlin, this week against the backdrop of the annual St. Petersburg International Economic Forum, attended this year by Citigroup Inc.'s Vikram Pandit, J.P. Morgan Chase & Co.'s James Dimon and Morgan Stanley's John Mack.

"Russia has been toying around with the idea of a central depository for about 20 years," said John T. Connor, portfolio manager of the Third Millennium Russia Fund. "They have a theoretical grasp of what they'd like to do, but the rubber hasn't hit the road."

Mr. Medvedev, widely seen as more investor-friendly than his Kremlin predecessor, Prime Minister Vladimir Putin, is probably seeking to "improve market infrastructure after its failings in 2008," said Mattias Westman, chief executive of Prosperity Capital, which manages Norway's oil investments in Russia. "The timing is uncertain, but they usually keep explicit promises."

In fact, the tax cuts Mr. Medvedev mentioned may not even be needed, said Renaissance Capital founder Peter Jennings, who expects to see renewed foreign investment in emerging markets this year "anyway."

Russia attracted only $5.8 billion in foreign direct investment in the first quarter of 2010, the slowest start to a year since 2006. Last year's $38.7 billion of foreign direct investment was only about half of that of 2008, according to central-bank data.

Yet the number of direct-investment projects climbed to 170 last year from 143 in 2008, according to Ernst & Young. Meanwhile, Russia-focused investment funds saw $1.9 billion of inflows--more than Brazil, India or China--in the first half of 2010, according to Emerging Portfolio Fund Research.